Can Kazuo Hirai Navigate Sony’s Sea of Red?

by Brad Moon | February 3, 2012 12:02 pm

Sony (NYSE:SNE[1]) faces challenging times. The Japanese electronics giant is under pressure on all fronts, with the biggest current fire probably being an ailing TV division that’s gone from a premium market leader to also-ran among rivals like Samsung (PINK:SSNLF[2]), while losing money for eight straight years.

Sony posted a loss of $2.1 billion for its October-December quarter and has forecast a $2.9 billion loss for the year to March, a gloomy starting point for the company’s new CEO, Kazuo Hirai.

Once a dominant player in the consumer electronics industry, Sony has misfired repeatedly. The classic example is the portable audio market, which it owned for two decades with its Walkman but has since ceded to Apple’s (NASDAQ:AAPL[3]) iPod. An early proponent of e-readers, when the e-book market began to take off, Sony offered models that were quickly eclipsed by cheaper, more capable models from Amazon (NASDAQ:AMZN[4]), Barnes & Noble (NYSE:BKS[5]), and Kobo.

Its 2001 mobile phone joint venture, Sony Ericsson, fell onto hard times after the 2007 release of the iPhone; the company posted consecutive net losses starting in 2008 and by 2010 had dropped to sixth place for world mobile phone sales. Sony bought out Ericsson in January for $1.5 billion.

Turning things around for PlayStation

In short, Sony has been a pioneer in many aspects of consumer electronics, then followed a strategy of offering premium products. However, in a world that’s been battered by a prolonged recession and invaded by cheaper products from Korean manufacturers who have upped their game, Sony’s market share has eroded. The only bright side has been its entertainment properties and its PlayStation division, which remain profitable.

Enter Hirai. A longtime Sony employee (he joined the firm in 1984), Hirai first worked in the music division but gained recognition when then CEO Howard Stringer assigned him to reverse the fortunes of the struggling PlayStation 3. After leading the home video game console market with the PlayStation One and Two, Sony had introduced the PS3 in 2006 as a premium console (complete with a Blu-ray player) at a $499 sticker.

Microsoft’s (NASDAQ:MSFT[6]) competing Xbox 360 started at $299 while Nintendo’s (PINK:NTDOY[7]) Wii was priced at $249 and the outcome of the price difference was a disaster for Sony. Under Hirai’s leadership, parts were outsourced, noncritical components jettisoned, and a slimmed down PS3 launched in 2009 for $299. After the new PS3 was released, the console’s sales increased by 23% for the year and the division become profitable. Last year, Hirai was given the job of heading up all of Sony’s consumer products and services business.

A radically different strategy in the offing?

If Hirai takes the same approach with Sony’s other product lines as he did with the PS3, expect to see shakeups. The company will cut costs and may sacrifice premium features or reduce the number of models it offers. It’s possible that it might simply exit areas that are unprofitable. In a Reuters article, Hirai was quoted as saying: “We cannot be afraid to make painful choices for the future of Sony.” He added that he would not hesitate to withdraw from businesses that were not competitive. He is reportedly pushing the idea of leveraging Sony’s entertainment business in its computer and TV divisions, seeking convergence.

Cheaper, more connected Sony products may stabilize the situation, but may not be enough to turn around the company’s fortunes. Selling products that are functional and aggressively priced helped its Korean competitors surge past Sony in the TV and computer markets. Sticking to expensive hardware that ignored consumer demands cost it in the video game, smartphone and portable audio markets as Microsoft, Apple and others seized the lead. If Sony is to not just survive, but regain its consumer electronics crown, Kazuo Hirai will need to balance the need for competitive pricing with an emphasis on innovation that’s been lacking in recent years.

As of this writing, Brad Moon did not own a position in any of the stocks named here.